Running a business successfully isn’t just about offering quality products or services. What happens behind the scenes often makes the difference — and strong financial recordkeeping is one of the most important pieces. Accurate records support your company’s financial health, ensure compliance with tax laws, and can generate meaningful tax savings. A recent Tax Court ruling is a reminder of just how costly poor documentation can be.

Why Good Records Matter

The IRS requires every business, regardless of size, to keep complete and accurate books. Without reliable records, it becomes extremely difficult to:

• Prove deductions and tax credits
• Track income, expenses, and overall profitability
• Prepare accurate financial statements
• Evaluate business performance
• Provide lenders with trustworthy information
• Withstand the scrutiny of an IRS audit

Simply put, good recordkeeping safeguards your operations and your tax position.

Court Case Highlights the Risk of Poor Records

In one case, a taxpayer who worked in the utility industry and also had business interests in a storm response partnership, a salon, and rental property, claimed a range of losses and expenses on his return. These included partnership losses and costs for travel, clothing, and tools.

But in Tax Court Memo 2025-12, the court disallowed many of the deductions. The taxpayer could not produce clear, consistent documentation to back up the expenses. For example:

• Travel and vehicle costs lacked mileage logs and notes that separated personal from business use
• For partnership losses, he failed to provide sufficient evidence of his basis — meaning the court could not verify how much he had invested

The court not only denied major deductions but also imposed an accuracy-related penalty, often equal to 20% of the underpayment. This case illustrates a recurring theme: each year, taxpayers lose legitimate tax benefits because their records don’t meet IRS standards.

Steps to Strengthen Your Recordkeeping

Businesses can avoid these pitfalls by adopting a structured and practical recordkeeping system. Consider these best practices:

• Separate business from personal activity. Use dedicated accounts for business income and expenses. Mixing the two increases the risk of errors and IRS challenges.
• Record transactions promptly. Document expenses as they occur — for example, keeping a contemporaneous mileage log for business trips.
• Keep supporting documents. Save invoices, receipts, canceled checks, credit card statements, 1099s, and payroll tax records. Digital copies are fine as long as they are legible and accessible.
• Follow IRS retention rules. In most cases, keep records at least three years, but longer for property, payroll, or when underreporting is suspected. If fraud or no return is involved, the IRS can audit without a time limit.
• Build internal controls. For companies with employees, establish safeguards such as dual approvals for large payments and separating duties among staff.

Key Takeaway

The lesson from the Tax Court case is clear: without strong records, even legitimate expenses may be disallowed. Don’t let preventable documentation issues cost your business money.

Contact your Dent Moses advisor for additional assistance.